Let's jump right in with an example. Let's consider Design/Build Financing for the Apex Apartments, and this example is actually abstracted from a real world problem. I've simplified it a bit and changed a few things around but it's very, very close to a real world potential project. Okay so the Apex Apartments if built, and I'll put that in here. If built are going to be a multistory graduate student housing complex in Lewisburg, Pennsylvania near Bucknell University. And this is a project under consideration by Core Asset Group, which does this type of off site student housing for various colleges and universities along the east coast. So what would the opportunity be here for Core Asset Group for CAG? Why would they want to do this? Well, here's the scenario, which i painted for us. Bucknell is primarily focused on it's liberal arts and existing colleges and it's thinking about it's graduate, it's engineering division into graduate in a much bigger ways. So in other words we have many more masters programs in this various engineering disciplines. They're not however is part of this planned expansion, planning to build any new housing for their graduate students. And also, CAG notices, a lot of work goes in to this. We're covering it very quickly, that the rental vacancy in the area is already pretty low. So they anticipate, there is going be a lot more demand and there's not a lot of housing already available, to meet that new demand by graduate engineering students. And let me just see if I can get. Down to another page I think I can there. A little bit more about CAG. CAG is a real private equity firm that specializes in institutional quality, student housing assets. They acquire, manage, and operate multi-tenant housing venues throughout the US and they were founded around 1998. Okay, so again first thing CAG is going to do is a feasibility study which is our quick and dirty check to see if this project might work without considering any time value or as professor Oda has already taught you the mathematics of money. Okay, so we won't even need any time value of money considerations. And they're also going to do a, what we call fully-financed-by-equity basis, that means the whole project would be financed out of CAG's own funds, okay? Without taking any construction loans or anything else, okay? As I say, this is usually our first step. Why is it our first step? It's because this finance by equity only assumption is very conservative. It maximizes your taxes generally, and it minimizes our financial leverage. That's the increased return that we get out of a project by taking out some loans to help us execute it. So if the feasibility study passes this, it's going to look even better when we start putting in some leverage and considering time value of money. And it also is a very good way. If it doesn't pass this test, there's no hope for it. So it's a very good way to quickly reject nominal projects. Okay, so I've got an Excel file available to you for this example called Apex.xls. And a lot of what I'm going to be showing you from now on is coming from that Excel file. I'm just going to jump into it quickly here and just so you can see what's going on here it is. This is for a financial plan lecture. But we're going to start with the feasibility page here. And as you can see we've got the basic information which I'll cover with you in just a second. We've got development parameters, etc, etc, etc. And this spreadsheet works its way down to finding out how much money we think that they could make on this project in a few different scenarios. Expected value scenario, that's our target scenario, poor situation scenario and great situation scenario. Okay, so we'll comeback to that in a bit. So let's go back to our presentation now. Okay, so this information as I just showed you very quickly is in the Apex spreadsheet, on the feasibility page. So what is CAG have to know to see if this project is going to be feasible to work for them. First step is to have a site, they have already decided on a potential site, it's 1 acre site in the area, it's unbuilt. They are asking prices 50,000, we're going to assume that, that's what they are going to pay for. So it's raw land, no utilities, no sidewalks etc. It does have electric, water and sewer on the street. So the general specifications that CAG wants an assumptions are as follows. Based on their experience doing this type of thing for other colleges on the East Coast. They think that they're going to be best off for grad students, making two bedroom apartments at 900 square feet per unit. They think that they're going to have to set aside 10% of the space per unit for circulation. So for in other words for every apartment they make they're going to need 9 square feet of circulation. They're going to do wood frame construction with no basement and this is going to be a two-story building here. And both of these things come from local codes around Lewisburg. They're going to offer two spaces per unit of parking. They think they can do this whole thing okay, time from purchasing the land to selling the property to someone who's going to be a property manager. Think they can do the whole thing in 12 months. If they do that they're going to need that 90% of all the units are going to be rented. They don't think they can buy a buyer who would be a cash flow producing property manager. They don't think they can find a buyer in the area, unless they have rental agreements in place for at least 90% of the units. They're also assuming that grad students will take 12 month leases. Which I think is a little dodgy, but they claim they've done this before, and it works for them. Okay, so whenever you get something like these set of specifications and assumptions. It's always a good idea to question them and go over them with, whoever you're working for in the firm, your managing director or whoever you working for as a consultant. Like I said, I think this is a little bit dodgy. I think this timing might be pushing it too. If I were consulting on this project for CAG, these are two things I'd want to discuss with them. Okay, we also have more on the local zoning that CAG needs to be familiar with, okay? This area is zoned for multifamily housing and or retail and commercial. So they don't need any kind of zoning exception to get in here. The maximum building height is two stories. That's where our two stories came from. The maximum number of units allowed for two bedroom apartments per acre is 34. Additionally, they need about 15% of the site area for set backs, 15% for circulation outside the building, site circulation. There are various other local code open space requirements, not including parking that take up about 10% of the acre. And for parking, the local zone encode says that they 100 square foot per acre and they need one parking space per two bedroom unit. So CAG is going to double that because they found that for their demographic, the grad students each want to have a parking space. Okay, two graduate students typically living per apartment and they each want a parking space. Okay, so in terms of development parameters we've got here the first thing that CAG wants to do is say considering all the things that the local zoning is making us do. Are we going to be able to fit 34 units in this acre? And if not, how many units can we fit into this space? So for the building setbacks, they need 15% of an acre, which you can check this, work out to 6,534 square feet. Similarly for circulation, open space requirements a tenth of an acre is 4,356 square feet. So you subtract this from an acre and you get what is available to build before they consider the parking, okay? And they want to build as simple a building as possible. So they'll assume that each story has 17 units on it, housing units on it. And so how much area are they going to need for all the parking. Well they have 34 apartments times two times 100. So they get 6,800. So now we have to subtract that and the first floor footprint available after parking is now about 19,000 square feet and change. And what we want to compare this to is the first floor space required for the target number of units, 15,300 plus the first floor space required for circulation and common which is 16,830. So they have available. This is bigger than required. The available is bigger than required. So in fact it's bigger than required by 2,500 square feet and change. Okay, so they can go ahead on this property without violating any building codes. They can go ahead and build this two-story wood frame building, 34, two bedroom units total, 17 on the first floor, 17 on the second floor. Okay, so here it is in summary. It might look something like what we see in this picture here. So the total square footage of the building first and second floor is going to be 33,600 square feet and change.
